Priscilla Toomey: The Importance of 'No Contingencies' in a Bidding War
Nov. 20, 2013: When inventory is tight, bidding wars happen. Whether you are the buyer or the seller, it's important to understand how they work and what your options are.
An offer consists of price and terms. We all know what price is, but terms can be just as important and can also affect the final price. In fact, sometimes there have been instances where terms trump price!
Terms include the preferred closing date and contingencies. Contingencies in this area are most commonly getting a mortgage commitment. That's because an inspection, which historically was a contingency, is now typically completed before contracts are signed.
That leaves the mortgage contingency as the sticking point. Why? Because the seller wants a non-contingent agreement in order to move forward with another purchase, and the buyer wants to be sure the property
"appraises out."
There are two key facets to getting a mortgage. The first is approval of the borrower, the second, approval of the property. To protect its investment, first, the lender "vets" the borrower and, typically, also attaches the condition that the borrower's circumstances (such as job status) continue unchanged until the closing date.
Once the borrower is "preapproved," the lender wants to know that, should the borrower default, the property could be sold for enough to pay back the loan. Typically, the lender will lend only up to 80% of the value the bank's appraiser places on the house, with the rest coming from the borrower to make sure that the borrower has what is considered to be sufficient "skin in the game."
Thus, a lot depends on the appraiser's opinion of the house's market value. Moreover, buyers can often be swayed by the appraiser's opinion of value into thinking it is more scientific than it is and, therefore, that the house is "worth" the amount the appraiser ascribes to it, even though that isn't necessarily the case.
Obviously, where there is no mortgage contingency, the risk of the house's market value falls on the shoulders of the borrower rather than requiring the seller to wait until the appraiser's report is in to see if it agrees with the negotiated contract price. Many times, if the appraised price is lower than the contract price, the contract price may need to be renegotiated or the buyer may need to come up with more cash to satisfy the lender's 80% requirement, which may jeopardize the transaction when buyer and seller don't agree.
Of course, where there is no mortgage and no appraisal, the transaction becomes non-contingent ("pending") upon the contracts being signed by both buyer and seller and the 10% deposit being paid. That could enable the seller to feel able to commit to a purchase 30 to 60 days earlier than otherwise, a significant bonus to many sellers and the reason why buyers frequently try to gain an edge in bidding wars by submitting their offers as "non-contingent."
Pictured here: Priscilla Toomey, associate broker, JD, ABR, Top5, certified EcoBroker, SRES with Julia B. Fee/Sotheby's International Realty; cell, 914-559-8084; e-mail,
Photo courtesy Julia B. Fee/Sotheby's International Realty
